Investing in April: Our Forecast in Brief

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Credit Suisse's perspective on economic and financial market developments over the short to medium term and their implications for investors. In light of the healthy economy, we expect further price gains for equities. Due to the tightening of monetary policy and potentially growing trade conflicts, volatility will remain high.

Healthy economic conditions and the solid profit situation allow us to remain overweight in global equities. However, we are orienting our portfolio to be more defensive because of the global trade tensions. We are concluding our overweighting of the Japanese equity market, but keeping euro zone and emerging market equities at overweight. We are also turning from industrials to tech stock, which we rate as positive alongside energy, financial, and telecom equities. Furthermore, we are remaining neutral for bonds overall.

We expect an outperformance for bonds from financial institutions, emerging market debt in local currency, convertible bonds, and inflation-protected bonds. However, we are scaling investment grade corporate bonds back to neutral. For alternative investments, we still prefer global real estate.

Slightly Less Momentum, But at a High Level

The leading indicators recently lost some of their momentum, but growth pace overall remains high. In the euro zone, the falling unemployment rate supports the recovery's sustainability.

In the US, there is effectively full employment. Tax cuts and increased spending will stimulate demand a little too strongly over the course of the year. In emerging markets, the momentum is gradually rising, but still has not reached the pre-crisis levels. China's growth stabilized at just above the mark of 6%.

From Weak Growth to Mini Boom

In 2018, the Swiss economy is likely to grow by 2.2%. The main growth driver is foreign demand. Our export barometer, which measures the economic development in buyer countries served by the Swiss export industry, is currently near its previous record value.

At the same time, the weaker Swiss franc against the euro is giving companies some breathing space when it comes to their margins. The improved profit situation and the good economic prospects should ensure above-average growth in capital spending on machinery and equipment.

Interest Rates: First Interest Rate Increase in 12 Years Expected in 2019

In the United States, the extremely loose fiscal policy resulting from tax cuts and spending increases requires a tighter monetary policy. We now expect a total of four 25-bp interest rate hikes from the US Federal Reserve (Fed) in 2018.

Meanwhile, the European Central Bank (ECB) is at least taking a less expansionary course: It is expected to end its asset purchase program in September and raise its key rates from 2019 onwards. The Swiss National Bank (SNB) is likely to turn the interest rate screw in the coming year as well, which would be the first interest rate increase in 12 years.

SNB's key interest rate has been falling for years

Source: Thomson Reuters, Credit Suisse

Currencies: Euro Should Be Able to Digest Italian Risk

In Italy, although the populist and euro-skeptic parties on the left and right side of the political spectrum won a majority, a coalition of the two seems rather unlikely due to other differences. Therefore, economic factors should prevail for currency development.

The good European and global economic environments should support the relationship between the euro and the Swiss franc, especially as the euro remains relatively favorably valued. We have slightly raised the three-month forecast for the euro–franc price, from 1.18 to 1.19, and thus assume a somewhat stronger devaluation of the Swiss franc.

Euro remains favorably valued against the Swiss franc

Source: Bloomberg, Credit Suisse

Equities: Swiss Market Burdened by Sector Composition

The Swiss Market Index has lagged slightly behind the global share index lately, despite the Swiss franc being weaker. On one hand, the world's best-yielding sector of IT is practically unrepresented among the Swiss large caps. On the other, the strongly weighted consumer staples sector continues to struggle with structural problems.

While the composition of the sector could continue to have a slightly negative impact, Swiss equities are supported by attractive valuations and a weaker franc. In a positive equity environment, we rate the market as neutral.

Underperformance of the Swiss sectors

Sources: FactSet, Credit Suisse

Commodities: Still Neutral

The commodity markets have been in a consolidation phase since the start of the year, but held up better than most equity markets. We continue to have a neutral view for the sector. Due to refinery maintenance until April, energy prices remain under seasonal pressure. Gold may remain trapped in a certain range: The rather weak US dollar is sustaining it, but the rising real interest rates in the US are weakening it. The slight slowdown in global industrial production also indicates little movement with industrial metals.

At the end of February 2018, the yield advantage of Swiss real estate funds focused on commercial space compared to residential real estate funds amounted to around 65 bps. It even moved above 80 bps at times during 2017. In view of the still-high yield premiums and the gradual convergence of losses suffered due to vacancies, funds with a commercial focus have become more attractive again. We expect this trend to continue since office spaces may benefit from stronger economic growth.

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